Mid Cap Fund

Manager Commentary as of 12/31/10

In the fourth quarter of 2010 equity markets continued their strong advance, particularly among small and mid-sized companies. The markets were buoyed by an increase in consumer confidence and the prospect of a more business-friendly political environment after the mid-term elections. For the quarter and the year, equity markets were up.

Despite strong absolute performance in this quarter, the Buffalo Mid-Cap Fund slightly underperformed relative to the benchmarks. The Fund was up 12.23% for the fourth quarter, compared to 14.01% for the Russell Midcap Growth Index, and 13.07% for the Russell Midcap Index. For calendar year 2010, the Fund was up a healthy 24.34%, yet slightly behind the two benchmarks which were up 26.38% and 25.46%, respectively.

Data represented reflects past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original value. Current performance may be lower or higher than the performance quoted. Performance current to the most recent quarter end may be obtained by clicking here. Performance current to the most recent month end may be obtained by clicking here.

Our underperformance for the quarter was due primarily to stock selection, with for-profit education stocks in the Industrials sector continuing to detract. These companies are attempting to strengthen their business models in anticipation of final Department of Education regulations. We have read the proposed rule changes and have selected some of the higher-quality companies which we feel will be well-positioned to fare better once the final regulations are enacted, creating long-term growth for the Fund. The Health Care sector has also been hindered by the specter of continued government involvement, creating uncertainty and inhibiting growth.

The underperformance in Health Care and Industrials was somewhat offset by positive returns in some stocks which, prior to the fourth quarter, held the Fund back because of their economic sensitivity. As more confidence in the economy has been established by recent political and monetary movements, those stocks have experienced a bounce. Our top-performing stocks for the quarter include Monster in the Industrials sector, and consumer names Abercrombie & Fitch, Gentex, and Whole Foods Markets. Detractors include education names Career Education Corporation and ITT Educational Services in Industrials, and Amylin Pharmaceuticals in Health Care.

We continue to use valuation as a guide to buy and sell stocks. During the period, one company was acquired from us, we started positions in 8 new stocks and we sold out of five positions, ending the quarter with 51 stock holdings. Additionally, we added to a few existing positions that have both attractive growth prospects and compelling valuation, and we finished the quarter with 6.76% cash, down from 8.02% at the end of September. Despite periodic performance setbacks, we do not abandon our discipline in pursuit of higher multiple stocks or more cyclical contributors. We favor high-quality companies with strong balance sheets that generate free cash flow. We believe these are the types of companies that should generate superior relative performance over the long term. Overall, we believe equities continue to look attractive relative to low-yielding alternatives.

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